What is a note? And how is it different than a mortgage?
A note is the document used to promise the repayment of the loan and a mortgage is a lien against the property to secure the loan.
A note is the document used to promise the repayment of the loan and a mortgage is a lien against the property to secure the loan.
Notes are created as an IOU. The benefit of a real estate note is that the lien is collateralized by real property.
A non-performing loan is a debt instrument (i.e., a loan) in which the borrower has stopped making payments. Notes are negotiable instruments so they may be bought and sold. There is a secondary market for performing loans, non-performing loans, and what is called “under-performing” loans – loans where a borrower has missed payments or been late on payments, but is not yet delinquent enough to be deemed non-performing. Also currently developing is a market for rehabilitated or re-performing loans, in which the borrower agrees to a loan modification with the lender and demonstrates an ability to continue making those payments.
Banks sell non-performing loans to other investors in order to rid themselves of risky assets and clean up their balance sheets. Sales of non-performing loans must be carefully considered since they may contain numerous financial implications, including affecting the company’s profit and loss, as well as tax situations.
Other reasons to sell include the much higher liability associated with foreclosure versus being the lender or note holder. Banks can also avoid having to pay back taxes, and they can expedite the recapture of capital for reinvestment. That’s because selling a note results in an immediate cash return versus foreclosing and marketing the house for sale as an REO asset.
Owning a loan usually results in an equal or greater cash flow or passive income with less liability than owning a rental property. We like to say, “Paper is much cleaner than Property”, because a note quietly sitting in a safe deposit box can make money for you while you sleep. Compare that to a landlord/renter situation with its incumbent problems, including sudden vacancies, repairs, property taxes, insurance and constant maintenance.
You are buying the debt instrument — the I.O.U. — secured by the mortgage. You literally are buying paper. You are purchasing the rights to collect on that debt instrument. And should the borrower fail to pay, you have the right to foreclose on that collateral. When you purchase a note, you receive the note and mortgage. In many states rather than a Mortgage a Deed of Trust (or Potomac Mortgage) may be used. Although a deed of trust serves the same purpose as a type of security, it differs from a mortgage. A deed of trust is an arrangement among three parties: the borrower, the lender, and an impartial trustee. In exchange for a loan of money from the lender, the borrower places legal title to real property in the hands of the trustee who holds it for the benefit of the lender, named in the deed as the beneficiary. The borrower retains equitable title to, and possession of, the property.
There are several ways to acquire the collateral (the house) when you own a note. This can occur through foreclosure, or by getting a deed-in-lieu of foreclosure, which simply means that the borrower signs the collateral over to you in order to avoid foreclosure. In many cases a deed-in-lieu is a win/win situation for all. The borrower gets rid of a debt that he or she cannot possibly pay, becoming free and clear of that debt. The lender saves the time and trouble — and cost — of not having to foreclose, and can then liquidate that collateral asset for cash.
Due to the overwhelming number of delinquent loans, investing in non-performing loans is becoming easier to accomplish. Some lenders, for example, prefer to sell notes as an option to foreclosure. They’d rather unload the bad debt, and give their problem to someone else. That could result in a price reduction.
Also enticing is the fact that it’s much safer to hold a note than own a property. For one thing, the purchase price on a note is usually less than that of an REO or the house itself. The liability as a note holder is much less than of a homeowner. And there may be certain tax benefits to owning notes versus real estate.
When a debtor has not made scheduled payments for at least 90 days, a loan is considered to be close to being in default. Once that loan is non-performing, the chance that it will be repaid in full by the borrower is substantially lower. If the debtor does initiate payments again on a nonperforming loan, it becomes a re-performing loan — even if the borrower has not caught up on all the missed payments.
The first rule is to work with the homeowner to design a payment plan and loan terms that work for their financial situation. The key is to engage the homeowner, build their trust and keep their best interest at heart. We have found that many times there are short term circumstances such as a health issue, job loss or divorce that are preventing them from making full payments on their mortgage loan. By purchasing their notes from the bank at such deep discounts, we are able to create a “win-win” scenario until they get back on their feet. Other strategies are payment plan reinstatements, reinstatement with discounts, refinancing, seller assistance, deed-in-lieu of foreclosure and foreclosure as a last resort.
Several things must occur, the most important being getting in contact with the homeowner. Many times, when borrowers get behind on their payments, they are embarrassed and avoid calls from their lenders. Some borrowers avoid the calls because they know that they cannot pay, and hope to delay losing their home. Contacting and then gaining the trust of the homeowner are top priorities.
Once contact with the borrower is made, a decision must be made about the possibilities that a loan modification can be completed. If so, the loan is modified and the borrower begins to make payments again (re-performing). If not, then the borrower and lender need to agree on a deed-in-lieu of foreclosure, or the lender needs to begin the foreclosure process.
A Broker’s Price Opinion (BPO) or Appraisal helps determine the value of the collateral. Also required is a title research to ensure that the chain of title of both the deed and the mortgage (or deed of trust) and assignments are clean. A determination also must be made to discover if there are any other liens either senior or junior to the note being purchased.
A recourse state or deficiency state means that if the loan is settled for less than the full balance — either through a short sale, short payoff or foreclosure — and it is sold for less than the full balance, the borrower is still responsible for the difference.
A non-recourse state means that the borrower is not responsible for that difference, and the lender has no recourse beyond the collateral. They cannot pursue the borrower for the deficiency.
Many note buyers get money through equity lines of credit through properties, cash savings, retirement accounts/self directed IRA’s, HSA’s, CESA.
Yes, you can borrow against them as well (that’s a collateral assignment and note and mortgage).
You will get the collateral in about 15 days. If you purchased a performing note the original assignment is sent to the recorder’s office for recording on your behalf. If you buy a non performing note YOU are getting a signed notarized assignment then you must send out the assignment for recording to the county recorder’s office for the property referenced in your note. (There are times when the assignment is not included and that is usually when we are waiting for a previous assignment in the assignment chain to come to us, so that the recording is completed in order).
Copies of: note, mortgage, workout letter (CAMA only), NSA, original recorded assignment after it comes back, purchase asset directive (CAMA only). If you have any questions about what these documents are please visit our glossary.
If the second (junior lien) is behind a performing first the most likely strategy would be to turn that non-performing note into a performing note. One of the biggest reasons people stop paying is because they are upside down in their property and see no way out. After working with the homeowner and helping them to find a manageable repayment schedule, they will likely keep making their payments as they have “emotional equity” and do not want to walk away from the home even if they are upside down.
When you buy the property, you are responsible for the repairs, maintenance, etc. With a note, you collect the payments and do not have to get your hands dirty. You control the property without the negatives of owning the property. Another advantage of owning paper over property is amortization over appreciation. In these volatile times, real estate amortization is a much more secure position.
Yes. They can be more secure than the stock market or actually owning the physical property. We deal with notes where a strong equity situation has been created, so if we have to foreclose on the property, the deal will still be profitable.
In most cases if the homeowner was paying when you bought the note you will be able to identify the reason for the delinquency quickly. if you are proactive and work with them to find a solution you can likely get them back on track and performing. If they are unable to keep paying you have basically two options: 1) Foreclosure and 2) Deed in Lieu of Foreclosure.
When you own the note, you control the property and the property owner pays you just like paying the bank (you are now the bank). In today’s market, with all the bad debt and upside down properties, many notes can be purchased at a discount. Being a property owner, you have to deal with the repairs, tenants, problems, etc. which can be costly and can eat into your profits. With notes, you collect the payments and if the homeowner chooses not to pay, you move to foreclose on the property. We deal with notes that have a good equity spread. If the property has to be foreclosed on, there is still money in the deal which, in many cases, can turn a higher profit. We use foreclosure as the last resort though. We only take possession of someone’s property as a very last resort.
They are discounted for a variety of reasons, such as performance, borrower status, and property value, condition, and status. Banks do not have the personnel to attend to and process defaulted notes resulting from interest rates on mortgage loans adjusting, natural disasters, fraudulent loans, unqualified buyers, housing price declines, and personal catastrophic losses to the borrower. Banks are in the business of lending money. They can lend out approximately 10 times the amount on a performing mortgage loan balance, depending on the institution’s financial strength. For example, a non-performing mortgage with a balance of $250,000 results in a lost lending opportunity to the bank of up to $2,500,000. Due to this regulatory requirement, economics prove that a discounted note today will reap far greater returns for the bank tomorrow by allowing it to put money back into loan circulation sooner rather than later. This is known as the Time Value of Money (TVM).
The borrower pays you as the owner of the note like they would pay the bank. You also control the property by owning the note. Those who control the debt control the property. You can also resell the note, if you choose (just like the banks), and reinvest that money into another note, or walk away with your profit!
We cannot promise you an exact yield because every situation is different. We can share that we consistently have investors calling in to tell us they are receiving much better than expected returns and are now going to refer friends and family. They also tell us they are doing better with notes than any other investment they’ve had in the past, including the stock market.
No. All property values are figured at today’s fair market value (FMV). We check many sources to come up with the actual value of the property in today’s market, including BPOs or appraisals. No one should use just one source. We use many sources to give all involved a more realistic value.
The application goes to the servicer immediately at funding and takes approximately four days.
Delinquent taxes do not go away, even if bankruptcy is filed. They have to be paid by someone. When you are looking to invest, figure the delinquent taxes into the scenario. If the numbers work, it may still be a good deal.
Depending on the investment structure and the amount, your investment is either secured by a single note, several notes or a portfolio of notes – with instant equity due to the purchase discount.
We sell notes in such a way that allows our investors multiple exit strategies for returns. By investing in a mini-pool of notes, you diversify your risk and allow for more exit strategies to work for your portfolio. Contact our Acquisitions Department for information about the exit strategies.
There are circumstances where we initiate foreclosure on properties in our portfolio. However, we make every attempt to help the homeowner keep their home. Foreclosure is generally a result of the homeowner avoiding discussions with us or where they have already vacated the property.
Usually, a promissory note is acquired instead of the desired cash during a real estate transaction. If retained long enough, many notes will eventually pay off. However, late payments, insurance liabilities, tax problems and foreclosure may soon plague some mortgage note holders. Even when these problems do not arise, many people would still prefer to have their cash right now!
Other Reasons Include: To Pay Off High-Interest Debts, To Invest In A Business, Real Estate Or Stocks, To Pay Tuition, To Remodel A Home, To Buy A New Car Or Boat, To Settle An Estate, To Provide For Relatives Or The Inability To Service The Mortgage. Some People Did Not Want To Carry Back The Note In The First Place, Or Have Grown Tired Of Collecting The Monthly Payments.
From Watermark Exchange or other banks and servicing companies.
Due to the overwhelming number of delinquent loans, investing in non-performing loans is becoming easier to accomplish. Some lenders, for example, prefer to sell notes as an option to foreclosure. They’d rather unload the bad debt, and give their problem to someone else. That could result in a price reduction.
Also enticing is the fact that it’s much safer to hold a note than own a property. For one thing, the purchase price on a note is usually less than that of an REO or the house itself. The liability as a note holder is much less than of a homeowner. And there may be certain tax benefits to owning notes versus real estate.
Watermark has strategic partners that train in the note investing arena and depending on your specific strategy we would be pleased to recommend a training program.
Since you are not allowed to contact the borrower before purchasing the note and Watermark will be releasing confidential credit information before said purchase, this information must be kept confidential.
Yes! Many note investors will put a premium on a note with a balloon because it allows them to plan how long their capital will be outlaid on a particular asset.
Yes, some buyers will buy new mortgages. (A seasoned mortgage is one that has been partially paid down and has therefore a payment history.) Price varies depending on how seasoned the note is.
When you own the note, you control the property and the property owner pays you just like paying the bank (you are now the bank). In today’s market, with all the bad debt and upside down properties, many notes can be purchased at a discount. Being a property owner, you have to deal with the repairs, tenants, problems, etc. which can be costly and can eat into your profits. With notes, you collect the payments and if the homeowner chooses not to pay, you move to foreclose on the property. We deal with notes that have a good equity spread. If the property has to be foreclosed on, there is still money in the deal which, in many cases, can turn a higher profit. We use foreclosure as the last resort though. We only take possession of someone’s property as a very last resort.
In most cases if the homeowner was paying when you bought the note you will be able to identify the reason for the delinquency quickly. if you are proactive and work with them to find a solution you can likely get them back on track and performing. If they are unable to keep paying you have basically two options: 1) Foreclosure and 2) Deed in Lieu of Foreclosure.
Yes. They can be more secure than the stock market or actually owning the physical property. We deal with notes where a strong equity situation has been created, so if we have to foreclose on the property, the deal will still be profitable.